Essential Economic Concepts: Supply, Demand, and Market Dynamics
Key Economic Concepts Defined
Economy: Basic Principles
The economy is the science that deals with the study of the satisfaction of human needs with scarce resources that have alternative uses, from which choices are made.
Economics: A Political Science
Economics is the political science that studies the laws governing the production, distribution, circulation, and consumption of material goods to satisfy human needs.
Bid: Buyer’s Willingness to Purchase
Bid: The amount of goods that buyers are willing to purchase at different market prices, by an individual or all individuals in a society.
Ask: Seller’s Willingness to Offer
Ask: The amount of goods that sellers are willing to offer at different market prices, by an individual or all individuals in a society.
Market: Buyers and Sellers Interaction
A market is a group of buyers and sellers of a good or service.
Non-Competitive Market Defined
A non-competitive market is a market in which there are many buyers and many sellers, but each exerts a significant influence on the market price.
Perfectly Competitive Market
A perfectly competitive market is a market in which there are many buyers and many sellers, so that each exerts a negligible influence on the market price.
Quantity Demanded Explained
Quantity demanded: The amount of a good that buyers want and can afford.
Law of Demand Principles
Law of Demand: A law stating that, *ceteris paribus* (all else being equal), the quantity demanded of a good falls when its price rises.
Law of Supply Principles
Law of Supply: A law stating that, *ceteris paribus* (all else remaining constant), the quantity supplied of a good increases when its price rises.
Law of Supply and Demand
Law of Supply and Demand: This law states that the price of an asset adjusts to balance its supply and demand.
Normal Good Characteristics
Normal Good: A good is considered normal when its demand increases as income rises, *ceteris paribus*.
Inferior Good Characteristics
Inferior Good: A good is considered inferior when its demand decreases as income rises, *ceteris paribus*.
Substitute Good Definition
Substitute Good: Two goods are substitutes when an increase in the price of one causes an increase in the demand for the other.
Complementary Good Definition
Complementary Good: Two goods are complements when an increase in the price of one causes a decrease in the demand for the other.
Demand Schedule: Price & Quantity
Demand Schedule: A table showing the relationship between the price of a good and the quantity demanded.
Supply Schedule: Price & Quantity
Supply Schedule: A table showing the relationship between the price of a good and the quantity supplied.
Demand Curve Visualization
Demand Curve: A graph illustrating the relationship between the price of a good and the quantity demanded.
Supply Curve Visualization
Supply Curve: A graph illustrating the relationship between the price of a good and the quantity supplied.
Downward-Sloping Demand Curve
Downward-Sloping Demand Curve: The demand curve is downward-sloping because a reduction in price increases the quantity demanded.
Upward-Sloping Supply Curve
Upward-Sloping Supply Curve: This curve has a positive slope, meaning that, *ceteris paribus*, a price increase leads to an increase in the quantity supplied.
Ceteris Paribus: All Else Equal
Ceteris Paribus: A Latin phrase meaning ‘all else being equal’ or ‘all other things held constant.’ It is used to indicate that all variables, except the one being studied, are assumed to remain constant.
Quantity Supplied Explained
Quantity Supplied: The amount of a good that sellers are willing and able to sell.
Market Equilibrium Defined
Equilibrium: A situation in which supply and demand are equal.
Equilibrium Price Explained
Equilibrium Price: The price that balances supply and demand.
Equilibrium Quantity Explained
Equilibrium Quantity: The quantity supplied and demanded when the price has adjusted to balance supply and demand.
Market Surplus Situation
Surplus: A situation in which the quantity supplied is greater than the quantity demanded.
Market Shortage Situation
Shortage: A situation in which the quantity demanded is greater than the quantity supplied.
Market Dynamics: Key Questions & Answers
Factors Influencing Demand
What determines the amount of goods demanded by buyers?
- Price
- Income
- Prices of related goods
- Tastes
- Expectations
Demand Curve Movements vs. Shifts
Does a change in consumer preferences cause a movement along the demand curve or a shift of the curve?
A change in any determinant of demand, *other than price*, causes the demand curve to shift.
Price Changes and Demand Curve
Does a change in price cause a movement along the demand curve or a shift of the curve?
If the price changes, a movement along the demand curve will occur.
Popeye’s Spinach: Inferior or Normal?
Popeye’s income declines, and he buys more spinach. Is spinach an inferior good or a normal good?
Spinach is an inferior good in this scenario, as Popeye’s demand for it increases when his income declines.
Impact on Spinach Demand Curve
What happens to the demand curve for spinach in this situation?
Since spinach is an inferior good and Popeye’s income has declined, the demand curve for spinach will shift to the right, indicating an increase in demand at every price.
Factors Influencing Supply
What determines the amount of goods offered by sellers?
- Price
- Input prices
- Technology
- Expectations
Technology & Supply Curve Shifts
Does a change in production technology cause a movement along the supply curve or a shift of the curve?
Whenever any determinant of supply, *other than the price of the good*, changes, the supply curve shifts.
Price Changes & Supply Curve
Does a variation in price cause a movement along the supply curve or a shift of the curve?
If the price varies, a movement along the supply curve will occur.
Market Equilibrium: Forces at Play
The market reaches equilibrium when supply and demand are equal. This balance is achieved through the interaction of various market forces.